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House competitions

6 October 2011

1. Introduction

1.1 Who should read this practice note?

All solicitors and employees involved in conveyancing transactions and the provision of advice in relation to the sale or purchase of homes.

1.2 What is the issue?

In an economic downturn, mortgages are harder to obtain and home owners find it harder to sell their houses. A small but increasing number of home owners are attempting to increase the likelihood of a sale by organising some kinds of competition in which participants can pay for the opportunity to win the property.

This practice note provides advice for solicitors who are asked to advise or assist with such transactions, and highlights risks relating to illegal lotteries, fraud and money laundering.

1.3 Professional conduct

The following sections of the SRA Handbook are relevant to this issue:

  • Principle 1 - Uphold the rule of law and the proper administration of justice
  • Principle 5 - Standard of service
  • Principle 6 - Public confidence
  • Chapter 3 - Conflict of interests

1.4 Legal and other requirements

Several pieces of legislation impose obligations on you with respect to this type of property transaction. If these obligations are breached, criminal sanctions can follow.

All links to legislation in this practice note will take you to the Statute Law Database website. The legislation contained in this database may not contain the most current amendments and you should take your own action to ensure you have the most up-to-date version of the legislation.

1.5 Status of this practice note

Practice notes are issued by the Law Society as a professional body for the benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. Solicitors are not required to follow them, but doing so will make it easier to account to oversight bodies for their actions.

They do not constitute legal advice and, while care has been taken to ensure that they are accurate, up-to-date and useful, the Law Society will not accept any legal liability in relation to them.

For queries or comments on this practice note contact the Law Society's Practice Advice Service.

1.6 Terminology in this practice note

Must - A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.

Should

  • Outside of a regulatory context, good practice for most situations in the Law Society's view.
  • In the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance).

These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.

May - A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.

2. Overview of selling a house by competition

2.1 General stages

There are a number of different variations on the process of selling a house by competition, but the general stages are:

  1. The house is valued at £X.
  2. The seller advertises tickets for a nominal value by comparison to the value of the house (for example £25 or £125).
  3. The value of the total number of tickets available for sale exceeds the house valuation.
  4. A minimum number of tickets are sold in order for the winner to be transferred ownership in the house.

The seller may also offer to donate proceeds above a certain value to charity if the sale completes.

2.2 Who holds the money?

The seller may hold the proceeds of the ticket sales in their bank account, or may ask you to hold the monies in your client account.

2.3 What if there aren't enough tickets sold?

You should manage your client's expectations on the likely success of this strategy for selling their house. Generally, if the minimum number is not sold, the seller can either:

  • transfer the property anyway
  • provide the winner with a stated percentage of the proceeds of the ticket sales, keeping both the house and the remaining proceeds.

If the seller doesn't receive enough interest in the sale they run the risk of not selling enough tickets to warrant the transfer of the house, or even to cover their costs. You should ensure that they understand the risk of this happening.

3. Is the scheme legal?

There is legislative control over the types of competitions which can be run in England and Wales.

For more information see the Gambling Commission website.

3.1 Illegal lotteries

You must determine if the proposed house competition is in fact a lottery. The Gambling Commission issued guidance on their website on the boundary between prize competitions, free draws and lotteries in November 2007.

A scheme will be a simple lottery if the following criteria are met:

  • a person is required to pay to participate
  • one or more prizes are allocated
  • the allocation of the prize relies wholly on chance.

Under the Gambling Act 2005 lotteries remain the preserve of good causes and therefore cannot be operated for commercial or private gain. Lotteries must be licensed by the Gambling Commission, unless they qualify in one of the exempt categories. Unregistered lotteries are illegal and any funds received from them will be considered the proceeds of crime.

3.2 Prize competitions

In an increasing attempt to avoid the need for registration of a lottery, many schemes for selling a house by competition are seeking to include a skills element, so that the scheme becomes a prize competition.

Generally, prize competitions are those in which success depends on the exercise of skill, judgement or knowledge by the participants rather than by chance alone. Genuine prize competitions are free of statutory control under the Gambling Act.

A failure to satisfy the skills, knowledge or judgement element may result in prosecution. This is a question of law for the court, so the Gambling Commission cannot give clearance to individual schemes.

3.2.1 The skill, knowledge or judgement element

The level of skill, knowledge of judgement to be demonstrated by participants must be high enough to satisfy the test in the Gambling Act. You should warn clients that if their scheme fails to meet the test they risk committing a criminal offence by offering an illegal lottery.

Meeting the skills element of the competition may however reduce the number of people willing to enter. This may prevent the seller from selling enough tickets to raise an amount equivalent to the value of the house.

4. Fraud and money laundering

There may be other risks posed to you through these transactions, even where the scheme is a legally recognised prize competition.

4.1 Opportunities for fraud

Fraud will arise where the seller is actively complicit in one or more of the following:

  • not owning the house they are offering as a prize
  • failing to abide by the terms and conditions of the competition
  • keeping proceeds from ticket sales without providing any prize
  • failing to include all of the eligible entrants in the draw
  • providing the answer to the competition question to one or more of the entrants
  • manipulating the draw in favour of a specific entrant
  • obtaining a new, or further mortgage over the property before the draw, without advising the winner
  • failing to declare problems with the title to the house or structural problems which would dramatically reduce the value of the property
  • not paying relevant tax.

4.2 Consequences of fraud

If a fraud occurs, the money received from the tickets will become criminal property. If the winner was complicit in the fraud, the house and/or any funds returned from ticket sales will become criminal property.

You should consider your risk of being complicit in any fraud or in dealing with criminal property. This risk will depend on your level of knowledge and the extent of your involvement in the transaction.

4.3 Money Laundering

Criminal activity will often generate large amounts of cash in smaller denominations. Integrating this cash into the mainstream financial system often poses a challenge for criminals. In house-selling competitions, often the price of the raffle tickets is low (under £100) and the number of tickets is very high (in the thousands). A criminal could use this opportunity to launder money by purchasing a large number of tickets either:

  • under their own name
  • through money-mules
  • under aliases.

This would place criminally derived cash into the financial system either through the seller's account or your client account.

4.3.1 Laundering through refunds

A raffle does not need to proceed to a draw in order for money laundering risks to materialise. If the competition is called-off under the pretext of non-compliance with the law, payments must be refunded. If the refund is by bank transfer, the funds remain in the mainstream financial system and look legitimate. If the refund is by way of cheque, the criminal receives funds which look legitimate to place into their own bank accounts.

4.3.2 Laundering through fixed-outcome draws

If the competition goes ahead with the seller manipulating the draw in the criminal's favour, funds could be laundered. This will be effective whether the draw is for a proportion of the ticket sales or for the actual house.

For more information see our anti-money laundering practice note.

4.4 Criminal liability

You should consider the risk of being complicit in a criminal offence. This risk will depend on the extent of your involvement with the transaction and/or any money deposited in client accounts.

You do not actually have to touch the criminal property in order for a money laundering offence to have occurred. Even if the funds do not enter your client account, and depending on your knowledge or suspicion with respect to the criminal property you may still be at risk of both:

  • entering into an arrangement to facilitate money laundering
  • committing a non-disclosure offence.

5. Acting on behalf of the winner

It is highly unlikely that a ticket purchaser will have received legal advice prior to the competition draw. If you are instructed by a ticket purchaser/winner to assist with the transfer of the title you should ensure that they are aware of any legal requirements and risks associated with the transaction.

5.1 Where you are also acting for the seller

If you are also acting for the seller, you must consider Rule 3 of the code of conduct before acting on behalf of both parties in the transfer of the title after the draw.

5.2 Where you have no prior involvement

You should consider the following risks and issues to help protect both your client and yourself from potential risks:

  • the competition was an illegal lottery
  • there is an unregistered mortgage or charge on the house
  • there are no instructions for the removal of the current mortgage or charge on the house prior to the transfer
  • structural problems, environmental contamination, planning issues or other defects to the house or title may exist
  • ownership may not be correctly registered if the ticket was purchased by co-habitees or a group of people
  • it may not be clear what purchase price should be listed on the transfer document – the price of the single ticket or the price of all of the tickets sold
  • insufficient stamp duty land tax or land registry fees may be paid on the transaction.

6. Protecting your practice

You should consider carefully the risks involved in accept a retainer relating to the sale of a house by way of prize competition, whether you are acting for the seller or the winner.

Where you have accepted a retainer of this type you should take the following steps to assist in protecting your firm and avoiding any breach of the law.

6.1 Establish appropriate client acceptance protocols

You should ensure that senior management approves the acceptance of any retainers of this nature to reflect the risks posed to the firm. This may involve:

  • sign off by the managing partner
  • sign off by a partner and the head of compliance, client acceptance or similar position
  • sign off by two partners.

6.2 Ensure you have sufficient legal expertise

If you are not an expert in gambling law and conveyancing law, you should consider both:

  • taking legal advice from an expert in gambling law
  • contacting the Gambling Commission for guidance on lotteries and prize competitions.

6.3 Know your client

For the purposes of the Money Laundering Regulations 2007, where you have been instructed by the seller your client due diligence obligations relate directly to them. However, knowing your client means more than just identifying them in accordance with the regulations.

Other relevant information may include:

The seller:

  • whether they have title to the house
  • why they want to sell the house in this way
  • whether or not they are worried by the prospect of not finding enough participants
  • how long the house has already been on the market, if at all
  • the source of the valuation of the house.

The winner:

  • how many tickets they purchased
  • what the source of the funds for the ticket purchases was
  • whether the winning ticket was purchased jointly with others.

6.4 Know the transaction

You should thoroughly understand the process of the scheme to mitigate the risks of fraud and money laundering. If any of the relevant aspects of the transaction give rise to a suspicion of fraud or money laundering, you should consider whether you can continue to act or whether you need to make a suspicious activity report.

Relevant aspects of the transaction include:

  • how entrants are able to purchase tickets and the information they have to provide when they do so
  • where the money from the tickets will be held and who can authorise any withdrawal
  • who will judge the eligibility of entrants
  • the processes in place to ensure that all eligible entries are included in the draw
  • how the draw will take place
  • whether the title is unencumbered, and if not, whether there are instructions from the seller to redeem the mortgage(s)
  • whether the terms and conditions of entry incorporate the terms of the Standard Conditions of Sale or similar conditions to enable the winner to see the terms on which the property will be transferred.

6.5 Protect your client account

Where funds are being paid directly to your client account, you may consider the following options to help minimise the risk of money laundering:

  • identify and verify all entrants
  • require identity information such as name, address and/or date of birth from all entrants and electronically verify a sample of these
  • require all tickets to be purchased via an electronic transfer from a UK bank account held in the same name as the entrant.

See also section 11.2.3 of our anti-money laundering practice note.

6.6 Oversee the draw

When acting for the seller, you should review the actual conduct of the draw and verify the identity of the winner.

6.7 Register the new ownership

When acting for the winner you should register the new ownership promptly and in a way which accurately reflects any joint ownership.

You should discuss with the Land Registry the correct sale price to be entered on the register.

You should ensure that the correct level of Stamp Duty Land Tax and Land Registry Fees are paid.

7. More information

7.1 Law Society

7.2 Other

 
 
 

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